As the big sell-off in the bond market in May and June has illustrated, bond investors are at the mercy of the Federal Reserve and its decisions regarding when to begin tapering back monetary stimulus.

The way Montier figures it, bond investors are thus faced with three scenarios: (1) tapering, a scenario in which bonds will have negative returns in the coming years; (2) no tapering, in which case bonds will have very low returns; and (3) an outright deflationary scenario - say, if the U.S. economy unexpectedly slips into recession again - which would presumably be good for bonds.

"In essence, in the absence of a strong view on deflation, you neither want to be long, nor short, Treasuries," writes Montier. "You just don't want to own any."

This leads Montier to pose the question:

The Death of an Asset Class?

I am well aware of the dangers of proclaiming the death of an asset class, because usually when this is announced, we witness an enormous bull market in the supposedly dead asset class. However, barring the deflation outcome, we could finally be witnessing what Keynes described as the euthanasia of the rentier:

"The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital… I see… the euthanasia of the rentier."

Assuming you aren't expecting outright deflation, then the best that can be said for owning some treasuries is that they act as diversification/insurance in the context of an equity portfolio. However, as Exhibit 9 shows, the correlation between bonds and equities isn't exactly stable - it wanders all over the place, and on average is positive! Certainly it is negative during a subset of events that are probably best described as deflationary busts (e.g., 1930s, 2008). So if this is the risk you are worried about, then perhaps you should own some fixed income. However, it isn't obvious just how much of a diversifier bonds can be at very low yields. Nor do bonds act as diversifying assets to events like the stagflation of the 1970s. Ultimately, if you own bonds as insurance you must ask yourself how much you are paying for that insurance, because insurance is as much a valuation-driven proposition as anything else in investing.

The chart below shows the rolling 5-year correlation between bond and equity returns.